Shares in Nostrum Oil & Gas (LSE: NOG) have made a stunning start to 2015, with the exploration and production company seeing its valuation soar by 41% since the turn of the year. Of course, sentiment had been extremely weak prior to this month and, even with such strong gains in recent weeks, Nostrum is still down 24% in the last year. However, after an upbeat production update released in the last few days and confirmation that the relationship agreement signed last year with key shareholders still stands, is now the time to add a slice of it to your portfolio?
Fourth Quarter Update
While a lower oil price is likely to hurt profitability for a significant number of firms across the oil sector, Nostrum appears to be relatively well positioned thanks to the fact that it has hedged a portion of its production. In fact, it has hedged 32% of its liquids production until February 2016 at $85 per barrel, which is a significantly higher price than the sub-$50 per barrel level at which oil is trading at the present time. Clearly, this not only provides Nostrum with a higher level of profitability moving forward, but also allows it to budget more effectively, which is good news for its future investment plans.
On that topic, Nostrum confirmed that oil production will remain flat at 45,000 boepd until a new gas plant has been completed in Kazakhstan in 2017, at which time it expects it to rise to around 70,000 boepd. In addition, Nostrum has confirmed that its capital expenditure is fully funded for the next two years and that it has a cash position of around $400 million, which shows that it remains relatively well-funded and financially sound.
Looking Ahead
Clearly, the future share price of Nostrum will depend to a fairly large degree on the price of oil and, although part of its production is hedged for the next year, the majority of it is not and this means that further declines in the oil price could still hurt its bottom line and its share price.
However, even if this does occur, Nostrum remains well funded in comparison to many of its peers and, looking ahead, this should provide investors with considerable confidence – especially because investment spending is accounted for both in the current year and next year, which should allow it to increase production by up to 40% by 2017.
As a result of this, Nostrum appeals as a long-term investment at its current share price. Certainly, it is a relatively volatile and risky play, but it seems to offer an enticing mix of sound finances relative to its peers as well as a bright long term future resulting from its plans to raise production levels significantly.